Finances can be an overwhelming topic for anyone, but especially for freelancers who are dealing with a potentially inconsistent income.
You don’t have to be an accountant to keep your business running.
Many freelancers use their personal bank accounts for business income, but it becomes much more difficult to sift through them when tax season approaches.
Instead of going through individual expenses line by line, you save time and the risk of mistakes by setting up separate business and personal accounts.
Finances
It makes it easy to keep track of what’s coming and going with your business, and you can also quickly and easily prove the health of your business finances if needed.
If you decide you want to incorporate your business into a limited company (more on that later), you will be required by law to have a separate bank account.
So it makes sense to do it now. It’s not just about your current bills and expenses. need to think.
Now that you are your own boss, you need to think about how you will fund your lifestyle in the future. Having a retirement strategy is important at any age, but the earlier you can start saving for later life, the better off you will be financially when you decide to retire.
There are several options available to freelancers, from a Roth IRA or Traditional IRA to a SEP or Solo 401(k).
So it may be worth sitting down with a financial advisor to determine which option is best for you, your income, and your income. financial goals.
Whichever retirement plan you choose, make sure you set up automatic contributions each month so you know you’re saving consistently.
The two most common business structures are sole proprietorships and LLCs, or limited liability companies. Each has pros and cons to think about, and not just in terms of your finances.
If you choose to be a sole proprietor, which many freelancers do, you can work straight away under your own name rather than a business name.
So it’s much easier and you don’t have to worry about any forms or fees to get started.
A sole proprietorship also comes with the added bonus of a simplified tax return as you will pay tax on all of your business net profits.
But there are also disadvantages to think about. Your personal assets are at risk with this business structure and you may find it difficult to get financing, making it difficult for you to scale your business.
As an LLC, you remove the risk of personal liability for debts, giving you protection as an individual from commercial debts or lawsuits.
It also makes it easier to get financing and tax benefits through federal tax laws that allow deductions of up to 20% of business income.
Of course, as an LLC you have to pay more expenses, including formation fees and higher costs during tax filing season, and you’ll need to keep business records carefully to maintain limited liability protection.
As it’s sometimes called, is extra cash you leave in your bank account to cover your essential expenses when you’re down at work or when you’re waiting for an invoice to be paid. For example, let’s say you make $4,000 in gross profit one month, but you only need $2,000 for living expenses and $500 for business expenses.
The money left over can serve as your cash cushion, so that later in the month when you’re not earning as much, you’ll have enough to comfortably cover all your expenses. Freelancers often have inconsistent income, so this buffer takes the pressure off. However, it pays to have a separate emergency fund in addition to your cash cushion – an emergency fund is reserved for those bigger expenses, such as your car breaking down or needing to take time off due to illness.
Source: Blog.freelancersunion